Educational Articles

Taking Advantage of a Drug Industry Trend

Jeremy Butler
| March 21, 2012

Other than an outright cure for cancer, or at least some form of gene-specific inoculation, drug companies have either cured, are controlling, or are at least managing most of the globe’s major diseases. Increasingly, drug companies are turning to three diseases that are still prevalent, need a better therapy, and are profitable to tackle. These maladies are hepatitis, diabetes, and obesity.

Hepatitis

Hepatitis is a disease that includes any type of inflammation of the liver. There are two types of hepatitis; infectious (viral), and non-infectious. Infectious comprises five viruses A,B,C,D, and E. Hepatitis C (HCV) is the most common virus (about 3.9 million people in the United States suffer from it), and it is calculated to be the result of 12,000 deaths a year. Hepatitis B is the next most prevalent viral form, but there are vaccines for B, whereas there is none for C.

Non-infectious hepatitis can be caused by medications, alcohol, genetic markers, obesity, immune system- and injury-related damage. The introduction of pegylated interferon (a class of medication), along with the adoption of a more healthy lifestyle, is generally sufficient to control and even reverse this type of hepatitis.

Recently, the FDA approved two new types of drugs for the treatment of HCV. They are the first in a new class to be approved since 2001. They are Victrelis (generic name is Boceprevir), made by Merck (MRK - Free Merck Stock Report), and Incivek (Telaprevir) made by Vertex Pharma (VRTX). They can be taken in pill form, three times a day, and although they are expensive (about $30,000 a year), they are covered by most health insurance companies. Used in conjunction with more traditional HCV treatments, such as pegylated interferon and ribavirin, these two new types of HCV drug have proven to be highly efficacious. Boceprevir and Incivek work by blocking protease, the enzyme that helps hepatitis reproduce. Potential sales of both drugs are in the billions of dollars given the growing prevalence of hep. C worldwide. Other pharmaceutical companies with HCV drugs close to FDA approval are Pharmasset, a subsidiary of Bristol-Myers Squibb (BMY), Gilead Sciences (GILD), Idenix (IDIX), Achillion (ACHN), Inhibitex), Enanta, a unit of Novartis (NVS),and Boehringer Ingelheim (private). Novartis and Gilead Sciences are probably the best investments to make in this space.

Diabetes

Type 1 and Type 2 diabetes are conditions in which the body lacks a normal supply of insulin to remove glucose from the bloodstream. Type 1 is generally hereditary, and accounts for about 10% of cases. Type 2 is environmental, accounts for the remaining 90% of cases, and is becoming more prevalent in children and in developing countries. Obesity is the leading environmental cause. Type 2 diabetes involves a gradual decline in the way insulin responds to changes in blood sugar (glucose). Although diabetes has been successfully treated for years by the introduction of insulin into the body via syringes and pumps, there is now a race among pharma and biotech companies to find a more efficacious drug that can be successfully administered in pill form or via an inhaler. Pills and inhalers are more popular, as they provide a more convenient and less painful alternative of delivering insulin or extracting blood samples, versus the pinprick method.

Topping the list is a new Type 2 drug called TAK-875, a pill made by Takeda Pharma. This medicine improves a patient’s blood sugar control without increasing the risk of hypoglycemia (low blood sugar). It has proven to be safer than Avandia, marketed by GlaxoSmithKline (GSK), which was withdrawn from U.S. markets due to heart risks. Too, the incidence of low blood sugar was only 2%, compared to more traditional Glimepiride, marketed as Amaryl by Sanofi SA (SNY), which was 19%. Next is Januvia, made by Merck, and the first in a new class of drugs called DPP-4 inhibitors. Following this is Bydureon, made by Amylin (AMLN), which is used in combination with the more conventional Metformin for tackling Type 2 diabetes. The last in the category of new medications is Symlin (also made by Amylin). This is given to treat Types 1 and 2. It is a synthetic form of a hormone produced by the pancreas. All told, there are now 12 individual oral medications available in the U.S to help 26 million (300 million worldwide) diabetics control Types 1 or 2, either on their own, or in combination with Metformin, Glimepiride, insulin, and/or each other.

Various forms of inhaled insulin have been developed over the years, the most well known of which is probably Exubera, made by Pfizer (PFE - Free Pfizer Stock Report) in collaboration with Nektar (NKTR). The problem with administering insulin in this format is that it is difficult to accurately deliver the prescribed amount, and it is also inappropriate for patients who are also asthmatics. Other companies that have developed or are continuing to develop inhaleable insulin devices are Alkermes (ALKS), working with Eli Lilly (LLY), MannKind (MNKD), and Aradigm in collaboration with Novo Nordisk (NVO). On the whole, we would be wary of investing in any company solely for its inhaleable device.

Obesity

The market for a side-effect free, effective, weight-loss drug is huge, particularly in the United States, where a third of the population is deemed to be obese (BMI of 30+), and another third is overweight. Over the years, weight loss drugs and methods have targeted three ways to lose weight. They include appetite suppression, the increase of the body’s metabolism (amphetamine-based), and interference with the stomach’s ability to absorb nutrients. There has been a veritable plethora of nutrients, supplements, and drugs that purport to enable people to “shed those unwanted pounds”. But the only prescription diet drug approved for long-term use by the FDA is Xenical, manufactured by Roche Holdings AG, which was approved in 1999. Xenical, also known as Alli or Orlistat, blocks fat breakdown, and thereby prevents fat absorption. The drug is rarely prescribed, however, due to its embarrassing side effects, and limited effectiveness. More recently, though, a FDA Advisory panel voted twenty to two to recommend approval of Qnexa, made by Vivus (VVUS). This treatment is a combination of the stimulant phentermine (the surviving part of the fen-phen combo), and the epilepsy/migraine drug Topiramate. Shares of Vivus nearly doubled in after-hours trading after the lopsided vote, reflecting the huge demand for a more effective drug. Two other small companies trying to gain FDA approval for their weight loss medications are Orexigen Therapeutics (OREX), and Arena Pharma (ARNA). Other drugs, which have been found to promote weight loss and which may eventually be prescribed for such use, are Revia (for opiate and alcohol addiction), Wellbutrin (depression), Ritalin (ADHD), and Topomax (seizures and migraines). All three (OREX, ARNA, and VVUS) of the aforementioned stocks are worth investing in.

Conclusion

We recommend investors buy a basket of the stocks picked from the aforementioned three disease categories, rather than buying any one stock. Investors can do this using their own selection, or by purchase a mutual fund, ETF, or Index fund that focuses on these three maladies. This will give a reasonable chance of success, while minimizing investment risk.

At the time of writing, the author didn’t have a position in any of the stocks mentioned.